Sunday, March 29, 2009

How will the other members of the G20 regard the recommendations, hectoring, or even ingratiating solicitations of the Americans at the upcoming G20 meeting in April? Who knows, but the following passage from Fitzgerald's Tender is the Night, on how Americans between the wars came to regard the English, gave me a sense for how non-Americans (and particularly Asians) probably regard contemporary recommendations from Americans regarding macroeconomic policy and financial regulation. Dick Diver, the protagonist, reflects:

He found something antipathetic about the English lately. England was like a rich man after a disastrous orgy who makes up to the household by chatting with them individually, when it is obvious to them that he is only trying to get back his self-respect in order to usurp his former power.

Which in turn suggests an interpretation of where the current crisis is putting the United States, in terms of imperial decline -- in some place analogous to where the European Great Powers found themselves after the war: bankrupt both financially and morally, but not yet at the point where another power is ready to formally replace them as the hegemonic center.

Wednesday, March 25, 2009

"It may well be that the determination of the government to punish certain malefactors of great wealth has been responsible for something of the trouble; at least to the extent of having caused these men to combine to bring about as much financial stress as possible, in order to discredit the policy of the government and thereby secure a reversal of that policy,so that they may enjoy unmolested the fruits of their own evil-doing.... I regard this contest as one to determine who shall rule this free country—the people through their governmental agents, or a few ruthless and domineering men whose wealth makes them peculiarly formidable because they hide behind the breastworks of corporate organization."- Theodore Roosevelt, August 1907, commenting on bankers' responsibilities for the Panic of 1907

Tuesday, March 24, 2009

The state is now being asked not just to call off its regulators or give tax breaks or funnel a few contracts to connected companies; it is intervening directly in the economy, for the sole purpose of preserving the influence of the megafirms. In essence, Paulson used the bailout to transform the government into a giant bureaucracy of entitled assholedom, one that would socialize "toxic" risks but keep both the profits and the management of the bailed-out firms in private hands. Moreover, this whole process would be done in secret, away from the prying eyes of NASCAR dads, broke-ass liberals who read translations of French novels, subprime mortgage holders and other such financial losers....

As complex as all the finances are, the politics aren't hard to follow. By creating an urgent crisis that can only be solved by those fluent in a language too complex for ordinary people to understand, the Wall Street crowd has turned the vast majority of Americans into non-participants in their own political future. There is a reason it used to be a crime in the Confederate states to teach a slave to read: Literacy is power. In the age of the CDS and CDO, most of us are financial illiterates. By making an already too-complex economy even more complex, Wall Street has used the crisis to effect a historic, revolutionary change in our political system — transforming a democracy into a two-tiered state, one with plugged-in financial bureaucrats above and clueless customers below....

These people were never about anything except turning money into money, in order to get more money; valueswise they're on par with crack addicts, or obsessive sexual deviants who burgle homes to steal panties. Yet these are the people in whose hands our entire political future now rests.

The game of chicken that the American oligarchs are playing with the Obama administration is to say: "The only way we're going to stop looting the system is if you engage in forcible mass repression of capitalism (e.g. pay caps across all exec compensation, confiscatory taxation of the wealthy, etc.), which we're betting you don't have the brains, balls, or political capital to do."

Monday, March 23, 2009

I can't believe I am writing this, but I really do feel sorry for the CIA, which is looking like it will be institutionally blamed for the torture policy which was initiated by the Bush White House and acquiesced to by the entire Washington establishment.

The bottom line is that Cheney, Bush, et al. ordered the CIA and other interrogators to "take the gloves off." The turn to torture was a political decision--and as such, it's one that the political decision-makers, not just the bureaucratic implementers, should be held ultimately responsible for. George Tenet was eager to please, to be sure, but there's no denying that the decision to torture was made by the highest politicians in the land, and that at the end of the day, it's those political decision-makers who should be indicted.

But that's not going to happen, as the Newsweek article inadvertently makes clear. Why? Because many of the politicians who participated in the decision to torture are still in power. To understand the political dynamic of these investigations of the CIA, it's crucial to understand that the spineless Democratic leadership, in the form of Feinstein, Rockefeller, etc, knowingly acquisced the decision to torture. They intentionally didn't ask too many questions -- precisely in order to give themselves the political wiggle room in which they are now self-righteously wiggling.

Feinstein's current posturing is merely designed deflect blame from herself and her class, positioning the CIA to take the political fall. Indeed, the CIA anticipated that this day would come, which was why they insisted that those infamous "torture memos" be written: to protect them when the political mood shifted. Alas, the Agency misunderestimated the profundity of the ethical corruption in Washington's political class.

What we're seeing is a political process analogous to holding Lubyanka interrogators responsible for Stalinism. The way that these hearings are trending, it's looking more and more like we'll end up with an Abu Ghraib-style "postmodern coverup" -- where a few underlings are brought into the docket, as the political class declares itself shocked, shocked that their underlings were following their orders. Such a process gives the appearance of justice being done, without it actually happening. This is to justice as truthiness is to truth.

The litmus test for whether the process involves an actual ethical and legal accounting for the decision to torture, or in fact is a postmodern coverup, is whether the political decision-makers become the focus of the investigation.

Friday, March 20, 2009

We have moved far beyond financial policy and into the kind of scandal that really gets taxpayers’ backs up. The greed of bankers slaps you in the face while the hubris of their leadership remains unchecked.

There is no sense of responsibility, no feeling of shame, no acknowledgment of any kind of mistake: read Lloyd Blankfein’s FT article again - or print it out and tape it to your wall. Because we now know, from the newly disclosed AIG counterparties list, that the wealth of Goldman Sachs insiders remains high solely because we saved their sorry bank, their failed risk management strategy, and their pretence of wisdom with our cash in mid-September.

This resentment against bankers pervades Congress, and even the Administration begins to get the message - being called "asinine" yesterday by Richard Kovacevich, the Chairman of Wells Fargo, may have helped underline to Treasury how deeply the bankers appreciate the help they have received. There can be no resolution and no moving on until there has been a proper congressional investigation, with full subpoena powers, into exactly what did and did not happen around AIG. This will take months and may well slow down the economy (Jamie Dimon’s clever point: if you vilify us, you will lose), but it is now inescapable. And, if channeled productively, this kind of hearing may lead to a better regulatory system (and smaller big banks) than the current anemic proposals on the table - as last weekend indicated, the G20 process is currently worse than useless on this issue.

Maybe we are finally witnessing the undoing of what John Robb acutely characterized as "an utterly complete cognitive regulatory capture of the US government" by the finance sector.

For decades, the wealthy have been held up as people to be admired, victors in the Darwinian economic struggle by virtue of their personal ingenuity and hard work.

Americans consistently supported fiscal policies that undermined middle- and working-class interests partially because they saw themselves as rich-people-in-waiting: Given time, toil and the magic of compound interest, anyone could retire a millionaire.

That mind-set has all but been eradicated by the damage sustained by the average worker's nest egg, combined with the spectacle of bankers and financial engineers maintaining their lifestyles with multimillion-dollar bonuses while the submerged 99% struggle for oxygen.

(The price of admission to the top 1% income-earning club last year was roughly $400,000.) That may account for the near-total absence of public outcry over President Obama's proposal to raise tax rates on the wealthiest Americans -- except of course from the wealthiest Americans.

[snip]

The shift in sentiment should surprise no one. As the management sage Peter Drucker once predicted, "In the next economic downturn there will be an outbreak of bitterness and contempt for the super-corporate chieftains who pay themselves millions. In every major economic downturn in U.S. history the 'villains' have been the 'heroes' during the preceding boom." Drucker was speaking in 1997, two downturns ago.

[snip]

There's a social value in suppressing income inequality. In a country with only a slightly less ingrained tradition of civility than the United States, the AIG affair would provoke rioting in the streets.

"We live in a country with tranquillity and good feelings toward each other, and that's precious," says Robert Shiller, a Yale University economist and coauthor of Animal Spirits, a new book about the psychology of economics. In the current crisis, "there's anger and a sense of injustice taking hold, and it's not in the interest of wealthy people -- you don't want people on the poor side of town to be angry with you."

[snip]

Thanks to the financial crisis... the claim of the rich to play an indispensable role in the American economy will be treated with more skepticism than in the recent past, and their ability to preserve their loopholes and other advantages in the tax code will diminish

Will the economy suffer as a result? The experiment is about to begin.

The executives and compensation experts quoted treat this as an insoluble dilemma. But it's no dilemma, but merely a problem, and one, in fact, with a ready solution: cap executive compensation at ALL companies, or (to be less interfering) slap a 90% tax rate on all earnings over a certain point.

When insiders have broken a financial institution, the most direct remedy is to kick them out. Traders are hardly in short supply, and you don’t need to rely on the ones who made the toxic trades in the first place. Companies must always plan around the potential departure of even their star traders, or they are certain to fail. A.I.G. does not need to keep all of its traders, especially since it takes far fewer people to unwind a portfolio than to build it up.

Thursday, March 19, 2009

A lot of commentators have pointed out the disproportion of public and Congressional outrage being directed at the $165M in “retention bonuses” being paid to certain executives from the multiply-bailed out AIG Corporation. Why are people so angry about the $165M in bonuses, while remaining at least (proportionally) passive about the $173B+ in bailout money that is largely going to AIG's counterparties--e.g. other banks and nonbanks? I have two thoughts about this.

The first is that I think part of what’s happening here is a corollary to Hitler's famous thesis about the role of "Big Lies" in politics (something Small Precautions has commented on in other contexts, as well). What Hitler acutely observed was this:

The magnitude of a lie always contains a certain factor of credibility, since the great masses of the people in the very bottom of their hearts tend to be corrupted rather than consciously and purposely evil, and that, therefore, in view of the primitive simplicity of their minds they more easily fall a victim to a big lie than to a little one, since they themselves lie in little things, but would be ashamed of lies that were too big.

The bailouts are the macroeconomic equivalent of a "Big Lie" – they represent a grandiose gesture, one ratified by Bush's admonishment in October that if the bailout wasn’t authorized, then "this sucker could go down." People were outraged by the bailouts, but at the same time, the very scale of the government's action signified the awesomeness of the executive. In other words, the bailouts represent a classic case of the political sublime – terrifying, and yet somehow worthy of respect by sheer grandeur in scale.

By contrast, using taxpayer money to pay the executives bonuses at a failed company seems like mere everyday corruption, petty and small. Instead of a sign of the government's awesome power, it is a sign of the Obama administration's weakness and impotence, a point underscored by AIG's message to Geithner that heand the taxpayers could basically drop dead.

Unlike Bush, Obama clearly hasn't mastered the political art of the Great Lie. Readers can judge for themselves whether they consider this a good or bad trait in his governing style.

My second thought about the anger about the bonuses is that what's really in play here is not just anger at taxpayer money funding executive bonuses, but a deeper resentment about executive excess in general. Whereas the bailout money could be justified as a necessary payout to prevent the sucker from going down, and thus as having some positive social benefits despite its hideous price, it's almost impossible pettyfogging to try to justify AIG executive bonuses as being somehow about protecting the system. What's more, the claim that those bonuses are a necessary part of the system (which is the basic argument for why the bonuses need to be paid), then it seems to underline the essential corruption of that system.

This explains the tentativeness of the GOP's and the wingnutosphere's attacks on the AIG bonuses. On the one hand, they recognize that it’s a useful stick with which to beat up on the impotence of the Obama administration. On the other, its underlying political emotion comes from a place that is dangerously at odds with the GOP's political culture, namely anger at arrogant executives. What's risky here for the GOP is that anger about AIG executives’ bonuses (or Citi's $10M executive suite remodel, or car company CEO's riding on executive jets, and so on) can easily spill into a generalized revulsion to outsized executive compensation and perks in general—which is of course what the GOP stands for, culturally.

And therein lies the real danger for the GOP's Richistan constituency: that one of the longer-term outcomes of the economic crisis is a cultural shift away from tolerance for the excesses of the corporate elite. Long-term economic downturns, particularly ones that seem directly linked to the excesses of the rich, usually do produce "Soak the Rich" demands.

Bernanke famously remarked that the key lesson he learned from his study of the Depression is that in the event of a collapse in liquidity, the Fed should do everything it can to revivify the market, up to and including dropping money from a helicopter. Hence the moniker "Helicopter Ben."

After yesterday's announcement that the Fed will be printing another trillion dollars, however, it occurred to me that the right way to envision Bernanke's use of the helicopter is not as a kindly humanitarian drop of necessary resources on suffering refugees, but rather something more like this:

Fareed Zakaria thinks Obama is conceding to the reality that the United State is not (indeed never was) a complete hegemon -- which of course has the hegemonists (which include the neocons, but which is absolutely not limited to them) hopping mad. Zakaria, on the money:

The problem with American foreign policy goes beyond George Bush. It includes a Washington establishment that has gotten comfortable with the exercise of American hegemony and treats compromise as treason and negotiations as appeasement. Other countries can have no legitimate interests of their own—Russian demands are by definition unacceptable. The only way to deal with countries is by issuing a series of maximalist demands. This is not foreign policy; it's imperial policy. And it isn't likely to work in today's world.

Who cares if it works, though, if it makes you feel morally righteous?

As William Gibson famously remarked, the future is already here, it's just unevenly distributed. If you want to glimpse one of our emergent futures, start with this stunning photo gallery depicting Detroit's infrastructural decay:

The pictures are haunting not just because of the physical destruction they portray, but because of the absence of any humans -- they are physical symptoms of abandoned dreams.

Saturday, March 14, 2009

The Washington Post, taking another step toward trimming the size of its newspaper, is folding its stand-alone Business section into the A section six days a week and drastically reducing the publication of stock tables...Columnists such as Steven Pearlstein and Joe Davidson will be moved..."What we're doing is eliminating things that readers can easily get elsewhere, where we don't necessarily bring value," Brauchli said.

But in a change from previous downturns, CNBC is now a place for politics, to borrow a phrase from its sister channel MSNBC. The network’s journalists have been encouraged to speak their minds, making the line between reporter and commentator almost indistinguishable at times.

Leading Nancy from Texas to opine:

"Get rid of the entertainment aspect and give us the news. Opinions and banter make me turn off the TV."

Information Wants To Be Free. Information also wants to be expensive. Information wants to be free because it has become so cheap to distribute, copy, and recombine---too cheap to meter. It wants to be expensive because it can be immeasurably valuable to the recipient.

There’s also the not-inconsiderable question of capitalism’s ability to decide, if not on the value of a commodity, at least on some sort of price for the damn thing.

Content is ubiquitous, commands almost no price, but nonetheless has a cost. To increase their returns the traditional media are shifting to context - bringing value in the words of the WaPo. But they are fighting the last war; context is also nearly ubiquitous, and since little of it is clever the price will bifurcate. To high-end prostitution:

Unlike most industries, escorts can charge higher prices when they are in greater supply. This is because price is one of the few metrics sex suppliers can use to convey quality. (In this way it is not unlike the hedge-fund industry.) The customer demographic is also wealthier, and a higher price deters customers from bargaining, which is considered poor taste.

The traditional media will never be able to compete on cachet and thus will have to be increasingly shrill and polarized to attract even a non-paying niche. On the high-end side a succession of saviors will continue to bilk the rich, both the new and the inbred. And all of this sound and fury will accomplish nothing, as Megan McArdle reminds us anyone who has:

"a good way to make money above and beyond broad, boring strategies like stock indices or bond funds, will not tell you about it."

Thursday, March 12, 2009

I wrote yesterday lamenting the lack of transperency about which counterparties are effectively getting the taxpayer dollars via the bailout of AIG. And as far as the empirical question of untransparency, I found this piece by Roubini buttressing:

Given that common shareholders of AIG are already effectively wiped out (the stock has become a penny stock), the bailout of AIG is a bailout of the creditors of AIG that would now be insolvent without such a bailout. AIG sold over $500 billion of toxic credit default swap protection, and the counter-parties of this toxic insurance are major U.S. broker-dealers and banks.

News and banks analysts' reports suggested that Goldman Sachs (nyse: GS - news - people ) got about $25 billion of the government bailout of AIG and that Merrill Lynch was the second largest benefactor of the government largesse. These are educated guesses, as the government is hiding the counter-party benefactors of the AIG bailout. (Maybe Bloomberg should sue the Fed and Treasury again to have them disclose this information.)

But some things are known: Goldman's Lloyd Blankfein was the only CEO of a Wall Street firm who was present at the New York Fed meeting when the AIG bailout was discussed. So let us not kid each other: The $162 billion bailout of AIG is a nontransparent, opaque and shady bailout of the AIG counter-parties: Goldman Sachs, Merrill Lynch and other domestic and foreign financial institutions.

However, on further reflection about the political wisdom of insisting on transparency, I've become a little more ambivalent. On the strict merits, transparency is obviously a good thing, and I continue to support it.

But what I've also realized is that the political reaction to the revelation of the counterparty beneficiaries might not be the one that I might wish. Specifically, while there would undoubtedly be some left-populist outrage at the hedge fund plutocrats who are getting their taxpayer-funded checks from AIG, there would also likely be right-populist outrage at the foreign banks that are also inevitably getting some of this money. And that's a disconcerting prospect, since the one thing that would turn the current crisis from merely a possible Depression into a certain one, would be a series of jingo-inspired attempts to attack foreigners, including foreign banks, investors, and producers. Competitive nationalist financial reactions would really recapitulate the spiraling political economy of the 1930s.

The unfortunate fact of the current situation is that we must all hang together, or we will surely all hang separately.

Tuesday, March 10, 2009

So where is all that AIG bailout money going? AIG itself is already bust, so the money we're pouring into it is entirely going to rpotect AIG's so-called counterparties. Josh Marshall yesterday laid out why the government feels it needs to do this:

If you've got a big insolvent bank and you need to make up a big hole on the balance sheet you've got, broadly speaking, four groups of people you can get the money from, or put a different way, who can take the hit: shareholders, depositors, bondholders and taxpayers.

Now, for most of these banks the stock price has essentially fallen to zero. So they're pretty much already wiped out. Not much to be accomplished there, although those folks want to hold on to their equity in the hopes that they may recover on the upside. Then you have the depositors. But in FDIC insured accounts, they've got a federal guarantee up to $250,000. And presumably those with really big sums on deposit have been proactive enough to spread their money around several institutions. So not much luck there either.

Which leaves you with bondholders (the companies creditors rather owners) and taxpayers. Now, on the one hand, this sounds like a no-brainer. If you lend money to a company that goes bankrupt, that's tough luck. Maybe you recover a percentage on the dollar of what you were owed. But too bad. Why taxpayers should cover those loses is really hard to answer. But let's try it.

The counter-argument is that if bondholders, especially the most 'senior creditors', take a big hit it, will create a big shock to the financial system worldwide, making bond-investing money extremely risk-averse for a long time and making the credit markets seize up again on far worse a scale than happened last fall in the wake of the Lehman bankruptcy.

A second issue is that a lot of these bondholders are other financial institutions, so you create a cascade of failure.

"A cascade of failure" certainly sounds ominous, like something the government should do its best to prevent. But it begs the question of which institutions, exactly, is it that are going to suffer from that cascade of failure? My friend AB lays out one obvious set of beneficiaries:

I am almost certain that many of the counterparties to AIG's credit default swaps, and thus the ultimate recipients of bailout expenditures, are hedge funds. There is no way to be sure because the information is confidential to AIG and the government has not forced public disclosure of those parties. Why am I so sure? Because 1) AIG was only one of a handful of entities that sold this type of protection and 2) the vast majority of protection buyers did not actually hold the underlying debt, but were instead making "naked" short trades betting that the paper would default, in other words, exactly the kind of trades hedge funds would make.

If this is true, then bailout money is not being spent to shore up core capital ratios of our most important lending institutions, but instead is going to benefit hedge fund managers and their investors. Hedge fund losses, even up to the point of liquidation, do not threaten the overall economy. When Amaranth lost 9 billion within a matter of weeks a few years ago, the government did not step up. There was no systemic risk then when a few very wealth investors lost their shirts. Why should there be now? And, needless to say, counterparty risk -- the risk that a counterparty like AIG will not honor its contracts -- is a well-established business risk, one that investors pay their money managers to avoid. When the managers do not properly avoid the risk, the resulting losses are just like any other losses that a hedge fund may experience. Besides, the entire legal basis for the light regulation hedge funds is that their investors are savvy and wealthy, a group seemingly in little need of tax-payer-funded largesse.

In sum, taxpayer dollars are going, in large measure, to protect the profits (or at any rate staunch the losses) of hedge funds--organizations run for the wealthy by the superwealthy. The urge to go grab a pitchfork when you realize this becomes almost unbearable. It's hard to escape the conclusion that it turns out that the old socialists were right when they claimed that the main point of the state is to protect the property interests of the bourgeoisie.

Let me accept, however, that as of now there is not yet enough popular outrage to spark the wholesale dispossession of these insipid denizens of Richistan. After all, Obama's already being called a socialist as it is -- imagine the reaction if he actually did take a socialistic approach to this crisis.

I have, however, a concrete proposal -- why not pass a law mandating that any counterparty to any institution that is receiving a bailout, if it wishes to collect on its contract, must publicly disclose its contractual obligations? Such a law would have two obvious benefits.

At a policy level, it would rapidly help to shine light on who holds the liabilities for the losses in the system right now. Given that a huge amount of the financial markets jitteriness has to do with the unknown nature of all the untransparent transactions that Wall Street has done over the last decade, this would immediately help to end the uncertainty which may not be the cause of the crisis, but iscertainly an exacerbating force.

At a political level, moreover, this law would be enormously beneficial, since it would mean that the real beneficiaries of the bailout monies would become much clearer. This would force naked political reckoning -- which of course, is precisely why such a law is unlikely ever to pass. Once it became clear who was getting the bailout money, populist outrage would likely get even worse, probably mandating the passage of laws putting politically unpopular counterparties at the back of the queue. Of course, this is exactly why I like the idea.

Monday, March 09, 2009

I wrote last week that it wouldn't be unreasonable to expect the S&P500 to bottom out around 150. That estimate was based, among other things, on the explicit assumption that profit for the S&P500 would fall by only a third.

Well, Warren Buffett said today that Berkshire Hathaway's 2008 profit fell by 62 percent, and its fourth quarter 2008 profit fell by 96 percent. If those are benchmarks for the profits of the entire industrial sector, we may be looking at an S&P500 bottoming out around 75, and the Dow in three digits, much as Professor Casti predicted.

(Comic footnote: In an apparent attempt to prove that American conservatism is the cognitive twin of Monty Python's Black Knight, AEI "scholar" James K. Glassman is still defending his claim that the Dow will soon hit 36,000.)

Saturday, March 07, 2009

We know the stock market is in a terrible funk. But for certain industries, the future apparently looks brighter than ever.

Update: In the Google Finance user comments on the Sturm, Ruger & Company stock, we have this lovely thread:

A: Whats up with this stock?

B: Everybody is buying guns, seeds, and other survival neccesities [sic] because Obama is destroying the country. Don't believe me? Try buying some ammo in the south.

C: The south. Try the northwest... I didn't even think about investing in firearms stocks until I went to our local gun store and saw the Obama full print with the caption "Employee of the Month" underneath

I don't necessarily buy all the particulars, but if you want a distilled expression of the terror felt by people who spend their time thinking about the global financial crisis, here is a succinct summary of how dire the situation is, and what we potentially face in terms of second-order political and social impacts:

It is high time for the general population and socio-political players to get ready to face very hard times during which whole segments of our societies will be modified, temporarily disappear or even permanently vanish. For instance, the breakdown of the global monetary system we anticipated for summer 2009 will indeed entail the collapse of the US dollar (and all USD-denominated assets), but it will also induce, out of psychological contagion, a general loss of confidence in paper money altogether (these consequences give rise to a number of recommendations in this issue of the GEAB).

Last but not least, our team now estimates that the most monolithic, the most "imperialistic" political entities will suffer the most from this fifth phase of the crisis. Some states will indeed experience a strategic dislocation undermining their territorial integrity and their influence worldwide. As a consequence, other states will suddenly lose their protected situations and be thrust into regional chaos.

This is couched as a prediction, rather than as a possible scenario, and as such I am not convinced. With that said, the case for the realism of this scenario is well made.

And just to be clear, when the authors talk about "imperialist political entities" being likely to suffer the most, they're talking about the United States. Even the NIC hasn't had the temerity to say this directly.

Tuesday, March 03, 2009

No one knows where the bottom of this bear market will be because, as I just pointed out, nobody knows how bad the economic contraction will be.

But let me provide some food for thought. If you look at the S&P500, the historic average price/earnings ratio is about 15 (based on trailing net earnings). Currently, with the S&P trading around 700, the P/E ratio for the S&P is about 18 (having peaked during the 2003 Bush bubble at around 60). That suggests that just on the mere earnings merits, the market is still overvalued, though not by much.

But to guess where the bottom of the market is likely to be, one should keep two additional facts in mind.

First, markets almost always overshoot on the way down. In fact, if you look at the two historically bad bear markets during the twentieth century -- the 1933 bear market and the 1974 bear market -- the bottom only came when the P/E ratio for the S&P500 had fallen to 6. Replaying that history suggests that the S&P500 may drop to around 230.

Second, because we're in a horrible real-economy contraction, corporate earnings are going to drop precipitously. Let's conservatively estimate that collective corporate earnings are likely to contract by a third before we hit the bottom. If you combine that with the previous assumption, namely that the P/E ratio will bottom at 6, then it suggests that the S&P500 may bottom out closer to 150.

Run the same logic for the Dow Jones Industrial Average, and it suggests that the bottom may be around 1400 -- which would represent a 90% decline from the peak, the same as took place during the Great Depression.

Note that this is not the worst case scenario, but rather a "historically average" scenario. I went to talk in Switzerland last Fall where I heard John Casti predict that the Dow would be in three-digit territory before this is all said and done.

As always, I recommend reading the National Review's Corner to get a sense for the current shape of right-wing's political id. The latest bee in their bonnet is how the continued collapse of equity prices shows that Obama's stimulus plan isn't working, and then they speculate how far the Dow is likely to fall.

First, it's just idiotic -- big fat idiotic, you might say -- to argue (or, actually, to assume) that there is a direct and immediate relationship between the state of economy and the level of the Dow Jones industrial average. In fact, during recessions, stocks typically start to recover many months before the real economy hits bottom.

The simple truth is that the extent of the current crisis, or recession, or Depression (or whatever we eventually decide to label this downturn) is only slowly becoming apparent, and as its scale and scope becomes more apparent, it is weighing down stocks. The stimulus package was never designed to help with short-term equity prices; as I say, it's an idiotic metric of the success of the package. It's designed to help the real economy, and as long as the second derivative on the real economy remains negative, there's just no hope for an equity recovery.

Politically, the Democrats should contest the idea that the level of the stockmarket six weeks into Obama's term (or even six months in) is an indication of success. I think most people know that, but apparently there's a gathering consensus (or perhaps more accurately, a symptom) on the right that stock performance is the only relevant barometer of economic success.

Actually, when you think about that a little bit it almost starts to become a parody of what's wrong with the way Republicans think about economics.

I'll address the question of where stocks are likely to fall to in a separate post.

Sunday, March 01, 2009

I have not been counting, but I believe Marc Fisher has penned the one millionth screed by an old-school reporter against those dang-ole, dang-ole blogs. Beyond the usual carping I found this exchange enlightening, my bold.

"Because of the Web, we've actually increased the number of words that we write about state government and politics," says Robert McCartney, The Post's assistant managing editor for metro news. Reporters who may find it harder to get stories into the paper write in more detail, often several times a day, for the Virginia Politics and Maryland Moment blogs.

Critics say that shift serves only the elite that's intently interested in state news, not the broader audience. "The insiders are still getting a full report on the blogs, but the rest of us see only what we want to see instead of the news we need to see," says Bob Gibson, executive director of the Sorensen Institute for Political Leadership at the University of Virginia and a former politics reporter for the Daily Progress in Charlottesville.

Again with the assumption that because something was in print it was seen; like the newspaper is a daily multi-vitamin that if swallowed distributes its contents equally throughout the mind. As is evident by McCartney's statement newspapers are increasingly posting "o'er land and ocean without rest" and contrary to Gibson's accusation of elitism they clearly "also serve who only stand and wait." The fact that this audience is blind is not a failure of the press, it is a failure of the people.